TAIPEI (S&P Global Ratings) May 18, 2018--S&P Global Ratings said today it had affirmed its 'BBB' long-term and 'A-2' short-term issuer credit ratings on Taiwan Shin Kong Commercial Bank Co. Ltd. (Shin Kong Bank). The outlook on the long-term rating is stable. The ratings on Shin Kong Bank continue to reflect our view of the implicit support from the financially stronger parent Shin Kong Financial Holding Co. Ltd. (Shin Kong FHC) group, due to the bank's core group status. The ratings also reflect Shin Kong Bank's strong capitalization and satisfactory funding profile. Counterbalancing factors include the bank's relatively limited market presence and above-average growth appetite. "In our view, Shin Kong Bank's strengthened capitalization has enhanced the bank's stand-alone credit profile," said S&P Global Ratings credit analyst Patty Wang. "We expect the bank to maintain strong capitalization over the coming one to two years, an improvement from our previous assessment of adequate capitalization. Shin Kong Bank has retained the majority of its net profits over the past few years as a merit from the parent group to support the bank's business growth and capital enhancement." Coupled with Shin Kong Bank's strategy to lower construction-related lending and to adjust its small-to-medium lending portfolio over the past two years, the bank's regulatory capital ratio and our risk-adjusted capital (RAC) ratio have improved year on year.

The RAC ratio reached 10.5% as of the end of 2017, up from 10.3% the previous year. We believe Shin Kong Bank can maintain strong capitalization over the next one to two years. The bank's issuance of perpetual, non-cumulative, subordinated debentures in March 2018 has further strengthened its capitalization, given that we regarded such debt as intermediate equity content.

We also believe the group's strategy for the bank to retain the majority of its net profits will help maintain its strong capitalization. In addition, we forecast Shin Kong Bank's risk exposure will grow by a high single digit in 2018-2019 coupled with minor growth in profits. "The stable outlook reflects our expectation that Shin Kong Bank will remain a core entity of the wider Shin Kong FHC group, and as such, the ratings on the bank will move in tandem with Shin Kong FHC group's credit profile and the ratings on the group's core units," added Ms. Wang. We may lower the long-term rating on Shin Kong Bank if the group credit profile deteriorates.

This could happen if: (1) we identify weaker risk management than we previously expected at the group level and its life insurance subsidiary, Shin Kong Life Insurance Co. Ltd., particularly on foreign-exchange-risk exposure or investment-risk concentration; (2) the group's credit profile deviates significantly from our base-case assumptions for its core subsidiaries, especially if Shin Kong Life's capital adequacy weakens due to poor earnings, slower value of in-force growth, or unexpected market volatility; or (3) the group's competitive position and management capability weaken such as through a damaged franchise or deterioration in the market share of Shin Kong Life's key product lines. We may raise the rating on the bank if we take similar rating action on Shin Kong FHC group, should the group demonstrate much stronger competitive and market positions relative to local peers'. Significant enhancement in the Shin Kong Bank's business profile would reflect such strengthening.

We may also raise the rating on Shin Kong Bank if the group improves its consolidated capital adequacy to at least the lower-adequate level through a substantial increase in capital. However, we believe an upgrade to be remote in the coming one to two years.